January 17, 2001 Federal Reserve Districts Eighth District - St. Louis

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The District economy shows several signs of slowing. Sales during the recent holiday season have been weak and below expectations, leaving many retailers with overstocked inventories. Early winter weather hurt. New and used vehicle sales are also slow, and inventories are high. Declines in demand have affected many industries; however, these declines have helped to ease labor market tightness somewhat. Many firms' profits are being squeezed by high fuel costs. Although new housing construction continues to slow, home sales have recently picked up in some areas. Loan demand has softened somewhat, while loan growth has been very mild. Several makers of fertilizer have stopped producing and, instead, have been selling their natural gas stocks on the market to boost profits. Consumer Spending Retailers report weak sales during the 2000 holiday season. Despite a last-minute pickup in activity just before and after Christmas, contacts report that, overall, sales are down 5 percent on average from a year earlier. Inclement weather resulted in many stores losing sales over several periods during the season, which partially accounts for sales growth that was below expectations. The weather did spur strong sales of seasonal products, such as winter coats, clothing and boots. Contacts at several major department stores report that electronics and small appliances have also been popular sellers. Fine jewelry and women's apparel, however, have not moved well. About half of the contacts report that current inventories are at desired levels, while others plan to reduce excess inventories by significantly discounting items in early 2001. Contacts report that the use of debit cards for purchases has increased substantially this season over last, even though their overall use is still small. Most retailers are guardedly optimistic that sales in the first quarter of 2001 will rebound, if weather conditions are favorable. Car dealers report that sales during the last two months of 2000 are down more than 5 percent on average from a year earlier. Used car sales, in particular, have experienced the largest decline. An early blast of winter weather, coupled with economic uncertainty and an anticipation of lower interest rates, are believed to have kept buyers away from showrooms. About two-thirds of the dealers note that current inventories are above desired levels. Most contacts are cautiously optimistic that sales in the first quarter of 2001 will rebound because they plan to offer more incentives--such as a wider use of rebates--to help boost sales and reduce inventories. Manufacturing and Other Business Activity Contacts in a variety of industries are experiencing a noticeable slowdown in demand. Slowing demand has helped ease labor markets somewhat, which has enabled firms to fill some of their vacant positions. Contacts continue to cite high fuel costs as a major problem. Although many firms pass on these higher costs to customers as surcharges, profit margins are still being squeezed. Weak demand for automobiles has caused two manufacturers to idle several plants for at least one week. The local steel industry continues to weaken, with several producers going out of business in the past few months because of lower demand and foreign competition. The wholesale trade industry in northeast Arkansas and the furniture manufacturing industry in northeast Mississippi are both experiencing reduced profits because of slower demand. The District's apparel industry continues to shrink, as a Fruit of the Loom plant in Arkansas closes to eliminate excess production capacity. Employment growth has been boosted by several firms expanding and relocating to the District. Memphis, for example, is increasing its status as a regional distribution hub, as a food distributor constructs a new warehouse and distribution center that will create 600 new jobs. A contact at a credit card company notes that it will employ more than 1,000 new workers at its global technology center in the St. Louis area during 2001. The District's high-tech sector continues to be volatile: Companies moving to the Louisville, Memphis and northwest Arkansas areas will create nearly 1,000 jobs in the coming months; several Internet companies currently in the St. Louis, Memphis and Louisville areas, however, have already cut their workforces, eliminating more than 600 jobs in the past two months. Despite slower demand in other sectors, General Electric is anticipating a strong year, as it plans to roll out more than 40 new products this year at its Kentucky Appliance Park. Real Estate and Construction Real estate agents report that home sales have recently picked up in some areas, especially Memphis and Little Rock, where year-to-date sales are above last year's levels. Median home prices in many District areas are currently down from their year-earlier levels. Residential construction continues to slow, with permits down from their month- and year-earlier levels in all District metropolitan areas. Builders, however, have expressed optimism about construction activity in 2001 because of expectations of lower mortgage rates. Nonresidential construction has been mixed, with pockets of activity in some areas, such as Little Rock, and substantial slowing of the market in others, such as St. Louis. As a result of the slower residential and nonresidential construction, fewer contractors are experiencing backlogs. Banking and Finance Total loans outstanding at a sample of small and mid-sized District banks are essentially unchanged, growing only 0.4 percent between mid-October and mid-December, thus continuing a trend of mild growth. Several contacts are reporting that loan demand has recently softened somewhat. Growth in commercial and industrial loans and real estate loans has been stagnant during this period. Consumer loan growth, however, is down about a percentage point; it had been up about 1.4 percent between mid-August and mid-October. At the same time, total deposits have grown about 1 percent, which is a slight uptick in this growth rate. Agriculture and Natural Resources A contact reports that nitrogen fertilizer prices have increased substantially over the past year, particularly during the fall, because the price of natural gas--a major cost-component of nitrogen-based fertilizer products--has more than quadrupled. In fact, some manufacturers have begun selling off natural gas stocks rather than producing fertilizer because this strategy is currently more profitable for them. Low water levels and ice on the Mississippi River have made travel difficult for barges and tugboats, hampering cargo shipments of commodities such as corn, soybeans and wheat. These conditions have also caused some barges to run aground earlier in the season than usual. Return to top Chicago Minneapolis